Nearly 1 in 3 Canadian Mortgages Are Still Going To Overleveraged Borrowers

Canada’s real estate market got a big boost from overleveraged borrowers, according to its bank regulator. OSFI data shows the share of mortgage borrowers that are overleveraged remains high. Overleveraged borrowers, those with a loan to income ratio of 450% or higher, have begun to taper with higher rates, but still represented 1 in 3 borrowers in the latest data—significantly higher than before the pandemic. 

Nearly A Third of New Mortgages Are Going To Overleveraged Borrowers

Canada’s overleveraged mortgage borrowers are still a big share of the real estate market. Highly indebted households represented 32.1% of mortgage originations in Q3 2022, down 6.0 points from the previous quarter. Yes, nearly 1 in 3 mortgages were still going to overleveraged borrowers—even as interest rates ripped higher.

A Third of Canada’s Mortgages Are Going To Overleveraged Borrowers

The share of mortgage originations at Canadian lenders that are have a loan-to-income ratio greater than 450%.

Source: OSFI; Better Dwelling.

The Share of Overleveraged Borrowers Is Falling With Rising Rates

Higher interest rates and falling prices have helped temper this demand. The share peaked at 40.2% of new mortgages in Q1 2022, a new record for at least 10 years, and possibly an all-time high. It remains elevated compared to historical volumes, which were already too high. 

The regulator emphasized the market’s shift to over leveraged borrowers during the pandemic. They estimate an average of 33.7% of originations since the start of the pandemic had a LTI of higher than 450%, compared to 23.8% in the period prior. 

Vulnerabilities Are Amplified By The Concentration At Smaller Lenders

Making this risk more complicated is the concentration of overleveraged borrowers at smaller lenders. OSFI found the highest share of loans with LTI ratios greater than 450% are located at Small and medium sized (SMS), and mid-tier lenders. 

The peak share of originations to overleveraged borrowers was much higher than normal. SMS peaked at 49.5% of originations in Q3 2021, while mid tier peaked at 45% of originations in the same quarter. In contrast, the share of total originations with a LTI ratio greater than 450% was 37.0% of originations that quarter. The concentration at smaller lenders means more vulnerability in a risk event. 

Canada’s Overleveraged Mortgages Are Concentrated At Small Lenders

The share of mortgage originations at Canada’s small and medium sized (SMS), and mid-tier lenders, with loan to income ratios greater than 450%.

Source: OSFI; Better Dwelling.

It’s also worth noting the distribution of smaller lenders saw a surge in highly leveraged borrowers. The first surge was in 2017, when BC and Ontario had a mini-speculative bubble. The second was during the pandemic, when record home price growth was sparked by low rates, and investors piled into the market. 

OSFI is considering further mortgage measures to address these issues. This week the bank kicked off a period of feedback on new measures they’re considering, as housing market vulnerabilities begin to rise. 

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